Is the Social Security Fraud Drawing to a Close?

Social Security, not Medicare or Medicaid, is the crown jewel of the entitlement state. For several generations now, it has been sold to voters as a more or less sacred compact. Many Americans still believe that the federal government maintains an “account” in their name, which contains assets. Some even think that their “account” contains their own contributions, carefully set aside for their retirement by Franklin Roosevelt or his successors. If this is not the biggest fraud in the history of the human race, it is certainly in the top five. Inexorable demographic realities are casting the shadow of extinction over Social Security; ironically, though, what may set the program’s demise in motion is a cheap political trick by the Democratic Party.

Last December, as part of a budget deal, the Democrats negotiated a temporary 2% cut in the employee’s portion of the payroll tax. Many economists argued that this was an inefficient tax cut, and it certainly contributed to federal deficits. But the politics of the payroll tax cut were powerful. Nine months later, the temporary payroll tax cut is about to run out, and the Democrats are trying to make a political issue out of extending it. This headline is typical: “The GOP will raise taxes — on the middle class and working poor.” “Raising taxes” means allowing a temporary cut to expire on schedule. So at least we have established a principle: if the Bush income tax cuts expire, that too is a tax increase.

Politically, the Democrats’ effort to portray themselves as tax-cutters is easy to understand. Last December, however, many of the more ideological Democrats protested that the payroll tax cut threatened the underpinnings of the Social Security program. This Huffington Post piece is typical:

Democrats have never allowed the rate to be cut, even temporarily, in the history of the program, because payroll taxes feed the Social Security trust fund and create the political base of support for the program…. Republicans have won a long-sought victory, even as President Obama hails it as a win for his party. …

Sen. Barbara Mikulski (D-Md.), who chairs the Senate Subcommittee On Retirement and Aging, said she’s concerned that the payroll cut will weaken Social Security and leave it vulnerable. “I’m concerned this could be the beginning of the slippery slope to getting rid of the payroll tax and cause a way of getting rid of Social Security as a public issue in the way of heading to privatization,” she said. …

Rep. Keith Ellison (D-Minn.), co-chair of the Congressional Progressive Caucus, echoed Mikulski’s concern. “On the surface, the payroll tax reduction of two percent is attractive, but when you get past the surface, it’s deeply disturbing. Because what it means is we’ll replace the loss of money from Social Security with general fund money, but in the past Social Security has been raided to help fund general fund programs. So how long will it be before somebody says Social Security is not sustainable and we need to cut the program?” he said. “I’m afraid we are feeding into a larger narrative that goes toward eliminating Social Security.”

Mikulski and Ellison were, I think, correct. As it becomes more obvious that Social Security is financially unsustainable, calls to reform the program will be irresistible. The most obvious reforms are to 1) increase the age of eligibility–that, essentially, is a done deal–and 2) means test the program. Once inadequate revenues lead to means testing, Social Security is just another welfare program, and we all know how popular they are. So the smarter Democrats are right to worry that short-term political gain from payroll tax cuts will ultimately undermine the viability of Social Security.

A year ago, liberals expected that when the temporary payroll tax cut expired, it would be Republicans, not Democrats, who would try to extend it. The same Huffpo article says:

Republicans acknowledged that the expiration of the tax holiday will be treated as a tax increase. “Once something like this goes into place, a year from now, when it expires, it’ll be portrayed as a tax increase,” said Sen. Bob Corker (R-Tenn.). … [M]embers of both parties are convinced that letting the payroll tax rate revert back to its current spot will be near impossible. …

A White House official dismissed the concerns. “It is explicitly temporary and there’s a general revenue transfer in the bill so it will not negatively impact the social security trust fund at all,” he said.

As recently as last December, Democrats didn’t foresee how desperate their political situation would look by August 2011. But today, in need of an issue–any issue–they are trying to sucker the GOP into opposing an extension of the payroll tax holiday. Kevin Williamson wonders why Republicans should fall into the Dems’ trap:

As part of a harebrained attempt to stimulate the economy, a temporary reduction in the payroll tax was appended to the deal to prevent the Bush-era income-tax rates from expiring. There is good reason to think that these kinds of short-term stimulus measures don’t do much good. …

Whatever they end up doing, Republicans should fight for one more change: making the rates permanent, at whatever level they end up at. …

Republicans, coming off of an Iowa presidential debate in which every single candidate on stage vowed to oppose a deficit-reduction deal in which $100 billion in tax hikes would earn $1 trillion in spending cuts…are going to look mighty foolish if they come out for jacking up taxes on lower-earning households with the nation on the brink of the second leg of a double-dip recession. President Obama will be more than happy to spend the next year campaigning on tax cuts. The short-term payroll-tax stimulus is a dumb idea, to be sure, but it is not the hill for Republicans to die on.

That proposition seems clearly true. But as hard-core leftists have recognized, the issue goes deeper. A long-time reader who is a careful student of entitlement issues writes:

Once this is accepted, Social Security cannot be sustained for very long in its current unfunded form.

If Obama is pushing for the payroll tax holiday I think it’s a classic case for the Republicans of “please don’t throw me in the briar patch!” Without the phony Social Security “accounts” and contributions, Social Security will be seen as just a Ponzi scheme. We’re stuck with it for those on it or near to be, but it has no future for anyone else. Politically, the payroll tax holiday is death for the left. Social Security is the foundation of the entitlement state. That’s why those lefties objecting to the payroll tax holiday are correct.

Call their bluff….heighten the contradictions! Raise the ante–permanent abolition of the payroll tax! What? It’s tax justice now but 10 months ago (and beyond to 1939) it was just swell? This is just so obvious an opportunity to hoist them on their own petard…and yet…the dumbass Republicans are giving the left an opportunity to do it to them!

Social Security has always been run on a current cash flow basis with no funded assets. Having the “Trust Fund Bonds” when Social Security is in deficit on a current cash flow basis just means that the government pays from OTHER current cash flow or issues new debt — and not internally to itself like the “Trust Fund Bonds,” but to the public…..which is exactly IDENTICAL to not having had a “Trust Fund” in the first place!

Of course, politically, it is a different matter as these lefties well know. The accounts, “Trust Funds”, etc. is just léger-de-main to trick the rubes into thinking there is something like a funded retirement plan, when in reality it is just a particular regressive tax scheme irrationally linked to a particular benefit scheme. If the actual mechanics and legal status of the program were widely and well understood it would be seen as, with respect to the retirement benefit, a Ponzi scheme on the one hand, attractive only to retirees and near retirees as relatively early entrants; and, with respect to a safety net provision, a simultaneously redistributive and non-means tested welfare benefit on the other.

The 2% payroll tax deduction, especially if it requires a specific vote to be re-instated, acts as the thin edge of the wedge for large scale entitlement reform, and one likely to be based on “defined contributions” and market values, not a defined benefit. This is an astonishing and unprecedented concession by the guardians of the entitlement state, and the serious left knows this.

But the Obama administration is looking for any port in a storm. Conservatives should take advantage of the opportunity to undermine the foundations of the welfare state.